TEAM, Inc. — Form 10-Q Summary
Business context and reporting period
TEAM provides specialty inspection, assessment, turnaround and on-stream industrial services to heavy industries. Its segments are Inspection and Heat Treating (IHT), Mechanical Services (MS), and Quest Integrity. This filing covers the three months ended August 31, 2015—TEAM’s first quarter of fiscal 2016—and compares results with the three months ended August 31, 2014. Financial statement amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Quarter ended Aug. 31, 2015 | Prior-year quarter |
|---|---|---|
| Revenue | $222.7 | $188.1 |
| Gross profit / gross margin | $63.1 / 28.3% | $56.3 / 29.9% |
| Operating income / margin | $4.4 / 2.0% | $11.8 / 6.3% |
| Net income attributable to TEAM | $1.4 | $7.0 |
| Diluted earnings per share | $0.07 | $0.33 |
| Operating cash flow | $9.8 | $4.9 |
| Capital expenditures | $11.2 | $5.5 |
- Revenue increased 18.4%; management attributed approximately $28.9 million of the increase to acquisitions completed after the prior-year quarter. Gross profit rose, but gross margin contracted by about 1.6 percentage points.
- Operating income fell 62.4%, while net income declined about 80%. SG&A was $58.1 million versus $44.5 million; interest expense increased to $1.7 million from $0.6 million.
- Operating cash flow improved year over year. Investing used $274.6 million, principally $263.6 million for acquisitions; financing provided $272.3 million, mainly through new-facility borrowings.
- At August 31, cash and cash equivalents were $40.0 million, with a further $5.0 million classified as restricted cash. Long-term debt was $359.1 million. Management reported approximately $85 million of available borrowing capacity.
- The July 2020-maturing credit facility provides up to $500 million: a $300 million revolving facility and a $200 million term loan. TEAM said it was in compliance with its financial covenants at quarter-end. The filing’s description of the interest-coverage covenant is unclear and should be checked against the credit agreement.
Material changes and management commentary
- Acquisitions: TEAM acquired Qualspec in July for $257.0 million cash, with up to $10.0 million additional consideration tied to operating results through year-end 2015. The acquisition was funded in part by the new credit facility and was included in reported results from July 7. Management expected it to add about $180 million in annual revenue and nearly 1,000 employees. A separate June acquisition cost $12.6 million, including contingent consideration.
- Segment trends: IHT revenue rose 29.5% to $136.8 million and Quest Integrity revenue rose 19.7% to $17.6 million; MS revenue was nearly flat at $68.4 million. MS operating income declined 45.8% to $3.6 million. Corporate and shared-support operating costs increased to $13.5 million from $7.9 million.
- Excluding acquisition-related revenue, management said IHT revenue grew 7.3%, while MS revenue declined 7.3%. Weaker Western Canada oil-sands activity, lower demand and currency effects pressured Canadian results; currency reduced current-quarter revenue by approximately $4.5 million. MS also experienced short-term deferrals of discretionary projects. Quest Integrity benefited from a significant Middle East pipeline project.
- Management identified current-quarter operating costs of $3.6 million for M&A professional fees, $0.7 million for intellectual-property defense, $0.7 million for ERP implementation, and a $0.5 million contingent-consideration revaluation loss. It said operating income excluding specified non-routine items would have declined $2.0 million, or 17.1%.
- Foreign-currency transaction losses were $0.5 million, and foreign-currency translation losses in other comprehensive income were $4.0 million. TEAM uses currency swaps and euro-denominated debt as hedges; the swaps’ impact was not material in the quarter.
- No specific earnings or revenue guidance is provided. Management stated that operating cash flows, its credit facility and other financing arrangements were believed sufficient for business needs. It cautioned that interim results are not necessarily indicative of full-year results.
Risks, contingencies and unusual items
- TEAM faces 92 pending lawsuits related to a 2007 Con Edison steam-main rupture, as well as Con Edison’s indemnification claim. The company said it could not estimate its potential liability, had not accrued amounts above its $250,000 insurance deductible, and believed insurance should cover the claims.
- Quest Integrity’s patent-infringement cases remain ongoing. A court denied preliminary-injunction motions in two Delaware cases; trial was expected in the second quarter of calendar 2016, and a Washington-case hearing was expected in the first half of calendar 2016.
- The Qualspec purchase-price allocation was preliminary. Goodwill increased to $262.2 million from $107.8 million, largely due to acquisitions. Contingent consideration liabilities totaled $9.5 million at quarter-end and depend in part on estimates and future business performance.
- TEAM reported disclosure controls operating effectively at August 31, 2015 and no material changes to internal control over financial reporting during the quarter. It noted that controls provide reasonable, not absolute, assurance.
Important facts for investors to verify
- Whether Qualspec meets performance expectations and how much of future reported growth is organic versus acquisition-driven.
- Integration costs, acquisition-related charges, contingent payments and the final purchase-price allocation for Qualspec.
- Debt, available revolver capacity, covenant definitions and headroom—especially the interest-coverage requirement, whose wording in the filing is unclear.
- Whether margins recover as acquisition and corporate costs evolve, and whether MS demand and Canadian activity improve.
- Developments in the Con Edison litigation and Quest Integrity patent cases, including any change in estimated exposure or insurance coverage.
- Collection of receivables and unbilled revenue, which was $29.7 million at quarter-end, and the effect of foreign-exchange movements on sales, earnings and cash.